BACKGROUND

Shelem was formed as an Oregon non-profit corporation on June 3, 1997. Application was made to the IRS for recognition as a 501(c)(3) tax-exempt charitable organization on September 23, 1997. Approval of 501(c)(3) status was received from the IRS on February 17, 1998.

The primary purpose of Shelem is the development, acquisition, and operation of senior housing. Senior housing may take the form of independent apartments without services, apartments with congregate services such as meals and housekeeping, and full-service retirement communities with multiple levels of care. While licensed nursing homes will not be actively developed, such facilities will be considered if they are a distinct element of a larger campus. The western states of Oregon, Washington, California, Utah, New Mexico, Nevada, Idaho, Montana, Arizona, and Wyoming are areas of primary focus for Shelem; however, projects in outlying areas will be considered if they are otherwise proved to be feasible.

INITIAL DEVELOPMENT/ACQUISITION ACTIVITIES

The target parameters for facilities which are developed or acquired include the following characteristics:

• 30 unit minimum for independent senior apartments (without services);
• 40 unit minimum for assisted living facilities;
• 80 unit minimum for retirement communities (with services);
• Current operating occupancy greater than 80%; and
• Facilities which are 30 years old or less.

Shelem will use a three-pronged approach to project development and/or acquisition. these areas of focus will include purchases, mergers and third-party development agreements.

Purchases may take a variety of forms. Selected real estate agents in target states will seek projects that are available on the open market. Assuming target criteria are met, and following necessary due diligence and feasibility review, all projects are considered eligible candidates. Purchases may also take the form of projects which are identified through indirect means that may not be on the open market but are, nevertheless, not meeting the strategic objectives of their current owners. While such communities may be owned by non-profit corporations (such as hospitals), full market value may be offered which could then be applied to other outreach objectives of the operators. Purchased operations will either be managed directly by Shelem, or through management contract with other service providers.

When existing non-profit organizations or facilities find themselves undercapitalized or otherwise unable to meet identified long range program or facility objectives, mergers are a likely possibility. A merger could occur if the organization's by-laws are modified to allow changes in the form and composition of the facility board of directors. Following such a modification, the restructured board would assume responsibility for the assetsand obligations, based upon Shelem's working majority of the board. With three directors of Shelem assuming new directorship roles, up to two members of the facility's existing board could assume positions on the newly modified facility board without compromising Shelem mission objectives. In all merger cases, it is assumed that the existing facility is organized as a non-profit charitable 501(c)(3) corporation, or its equivalent (such as a housing authority, educational, governmental, or religious organization). As such, money may not necessarily change hands as a result of the merger. New projects resulting from mergers will either be managed directly by Shelem, or by maintaining relationships with existing management sources or others acceptable to the board.

Development agreements will be explored in such markets and locations where facility demand has been demonstrated. Turn-key developments will be considered where Shelem provides long-term or take-out financing, while the developer assumes the construction and fill-up risk. New projects resulting from turn-key development agreements can be managed directly by Shelem, through separate contract with the project developer, or by contracting with other service providers.

ORGANIZATION

Upon the successful completion of the first developed or acquired project, the Shelem operational framework will be implemented.

The three key operating departments will be Development, Program and Operations.

Shelem's Development Department will be headed by it's own Director and will coordinate all new project development and acquisition activities. An area of focus for the Director of Development will be acquisitions and corporate mergers in which Shelem provides project acquisition and expansion capital, programmatic modifications and other changes as recommended in an extensive management audit, while at the same time substituting key members of the Shelem Board of Directors, for some or all of the existing facility board.

The Director of Marketing will be responsible for the Program Department. Marketing will be responsible for the continuity of all corporate and facility marketing activities, and will be charged with the development of corporate policies and procedures.

Initially, the Operations Department will be headed by the Executive Director. The Executive Director will function as the Chief Operating Officer and Chief Financial Officer. As such, the Executive Director will oversee agents who are engaged in the active solicitation of new projects, coordinate facility management contracts, maintain corporate operating expenses at levels which balance financial integrity and long term strategic goals, and ensure that facilities are all operating within target parameters. The Executive Director will also coordinate corporate fund development activities.

As corporate operations reach stable levels, and are enjoying operating economies of scale, the following departments will be established as distinct entities: Marketing, Program, Finance, Planning & Contract Services, Fund Development/Benevolent Outreach and Regional Project Management.

FINANCIAL PLANNING STRATEGY

Generally speaking, net uncommitted proceeds from project financing will be utilized as seed money for the hard and soft costs associated with the development of future projects. These proceeds may be used for site control, professional services, or other unavoidable pre-development expenses (such as the regulatory requirement for some projects in selected states to pre-sell a portion of the proposed units prior to groundbreaking, resulting in significant marketing expenses).

As the financial feasibility for project development or acquisition is being considered, several criteria will need to be assessed with respect to target project goals. Among these criteria are purchase price, debt service reserve requirements. Shelem development reserve, loan origination costs, projected net operating cash flow, and resulting debt service coverage ratios.

Debt service reserve requirements will be estimated as the equivalent of one year's principal and interest payment on the long-term debt, the interest earnings from which will become unrestricted cash flow for Shelem.

Loan origination costs will include, but are not limited to, investment banking origination fees with related services (estimated at 3.125% of the par amount of bonds), project feasibility analysis (estimated at 0.50% of the par amount of bonds), and Shelem legal review costs (estimated at 0.25% of the par amount of bonds). Loan origination costs, including mandetory debt service reserves, may equal 10 - 12 % of total principal amount of long-term debt.

Net operating income generated from individual projects will be used to offset corporate operating expenses. Net operating receipts may result directly from operations, from collected management fees, or project lease revenues to third party operators..

PROJECTED OPERATING REVENUES

Clearly, operating revenues cannot be estimated with any degree of certainty without knowing the size or scope of the proposed project(s). Nevertheless, the source of operating revenues will be derived from operations and/or management fees. Operating revenues are limited to management fees in those projects that are operated under federal or state subsidy programs and are otherwise prohibited from retaining any excess revenues.